Good afternoon, everyone, and welcome to the Superior Group of Companies Third Quarter 2020 Conference Call. With us today are Michael Benstock, Chief Executive Officer; and Mike Koempel, Chief Financial Officer. And as a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding how the company's plans, initiatives and strategies and the anticipated financial performance of the company, including, but not limited to, sales and profitability. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties are further disclosed in the company's periodic filings with the Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10-K and the quarterly reports on Form 10-Q. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements contained herein, except as required by law. And now I'll turn the call over to Mr. Michael Benstock.

Thank you, operator, and thanks, everyone, for joining us today. I'll start by highlighting our consolidated third quarter results, along with a discussion around our strategies that are setting us up for continued growth and margin expansion. I'll walk through each of our segments and what we're doing in more profitably grow each of our businesses. And then I'll turn it over to Mike to provide additional detail on our quarterly results as well as our updated full year outlook. We'll then open the call for Q&A. Earlier in the year, we discussed the back-end weighted nature of our financial performance this year. And as expected, our third quarter results were the strongest of the year so far, reflecting sequential improvement across the business. We generated consolidated third quarter revenues of $136 million, down only 2% year-over-year, which was a significant improvement over the second quarter's 13% year-over-year decline and up 5% from the second quarter. Our third quarter consolidated adjusted EBITDA of $9.3 million is the highest quarterly result year-to-date, down just slightly compared to the prior year's $9.7 million, but up $1.8 million from the second quarter. Lastly, diluted EPS of $0.19 was down from adjusted EPS of $0.27 a year earlier, excluding last year's impairment charge, but up $0.11 sequentially from the second quarter. The effect of economic conditions on our business differs customer by customer, market by market and segment by segment. We see conditions slowly improving as clients are starting to buy more, rebrand more and issue more RFPs than past periods. Again, it is really on a customer-by-customer, market-by-market basis. While we're feeling optimistic about the long-term outlook, our success will be determined by our team's remaining focused on what we can control. This includes continuing to drive positive cash flow and further strengthening…

Thank you, Michael, and thanks, everyone, for joining the call. Our third quarter results were the strongest so far in 2023, reflecting the back-end weighted pattern we described earlier in the year. Our quarterly revenue reached $136 million, up about $7 million from the second quarter. And importantly, we recorded stronger margins as well. Our gross margin came in at 39.1%, which is up 260 basis points versus a year ago and up 220 basis points from the second quarter. The margin expansion from last year was primarily led by our Branded Products business segment, which drove a 450 basis point improvement due to favorable pricing and customer mix and lower supply chain costs. Our third quarter SG&A cost of $47 million were up $3.4 million from last year and increased as a percent of sales to 34.7% for the quarter compared to 31.6% for the third quarter of 2022. The increase in SG&A was driven by a $1.8 million fair value benefit on written put [ph] options in the third quarter of 2022, combined with current quarter increases in acquisition-related earn-out liabilities, bad debt expense and professional fees. Our interest expense for the third quarter was $2.5 million, up from $1.8 million in the prior year quarter due to higher interest rates. Interest expense did improve slightly from the second quarter, reflecting lower debt outstanding, as I'll discuss in a moment. Third quarter net income of $3.1 million or $0.19 per diluted share compared to the prior year quarter's net loss of $12.7 million or $0.80 per share. In the prior year third quarter, the company recognized pretax noncash impairment charges related to goodwill of $21.5 million or $17.1 million net of tax or $1.07 per diluted share. On an adjusted basis, which excludes impairment charges made in the…

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Kevin Steinke with Barrington Research. Please go ahead.

Good afternoon. Congratulations on the sequentially improved results. Just as we look to the full year outlook, you adjusted the revenue range a bit. So just wondering that still, again, represents a stronger sequential quarter. You mentioned the upper demand trend in Branded products I guess the outlook came down just a bit. So I don't know - I'm just trying to put my finger on maybe what changed relative to your last outlook as this quarter progressed?

Sure, Kevin. This is Mike. I'll take that question. As you said, obviously, we pulled the sales guidance down a little bit. It still reflects continued growth in the fourth quarter within that range. Within branded products, as we said in our prepared remarks, they had demonstrated growth in the third quarter. We expect to see that growth continue into the fourth quarter. I think part of what plays into the range, particularly in branded products, we have a fair amount of volume in the back half of December, which we plan to deliver on, but could create some variability in the fourth quarter. And as it relates to our Contract business, we're also - as we manage our cash flow and manage inventory tightly, we're managing the build of our contract assets, which ultimately turns into revenue as well. So as we've been heightening more on the working capital front, that's also had a little bit of a pullback on revenues. But again, I think as we look to the fourth quarter, we still see growth in the business. Again, as I said, albeit at a slightly lower rate than we originally expecting, but again, still anticipate that growth coming in the fourth quarter.

Okay. Good, thank you. And touching on Health Care Apparel, you mentioned there, the market still remains a bit soft, but you did have some pretty good sequential growth there in that segment. And I believe you mentioned that the market appears to be approaching inventory equilibrium. Do you think end of 2023 is still the way to think about the inventory coming back into balance? Maybe it's harder to read in the overall market, but just for you internally, how are things trending on the inventory side?

Kevin, from an internal standpoint, we are trending toward our goal by the end of the year. We see - you could see in the aggregate, our inventories across the peer group were down about $20 million from the beginning of the year, and that would obviously include our health care inventories coming down. So we're happy with the progress we've been making. We've got a little bit yet to go here in the fourth quarter. And again, our intent is to end the year in a much cleaner position than we did last year and entering 2024 in a way that we can really focus most of our energy forward rather than looking to reduce inventories and liquidate inventories. I think we're seeing the market in general, improved to some extent. But I can only, at this point, speak for ourselves. And again, we're satisfied with the progress we've made and feel good about where we'll end the year from a health care perspective.

Okay. Thank you. Also following up on Health Care Apparel, you mentioned the B2C e-commerce initiative continuing to trend well ahead of expectations. Maybe just any update on the outlook there and it starts becoming a more meaningful part of the business and potential growth in 2024 and beyond?

Kevin, this is Michael. Good question. We're excited about the progress we've made even when you take it one step further and say the broader digital market, which includes all those wholesale customers that we sell online as well, like amazon.com, walmart.com, and target.com and so on, obviously, inclusive of both the direct-to-consumer and the B2B channels. We're very, very excited about the whole -- what's happening to us digitally. More people are buying online than ever. And while store traffic is still down, and certainly, the smaller retailers are struggling more than the larger retailers. Our emphasis on -- at least on the investments we've made in our digital capabilities certainly has paid off somewhat this year. We'll continue to pay off in 2024 as we spend more on marketing, rebranding and to realize the full potential for 2024. We're learning as we go. We're testing and learning. We're gathering key customer insights. Our goal is to better inform our strategy to spend more carefully and in a more targeted manner. We see this talent becoming a larger portion of our business over time. We'll be significant enough in 2024 that we'll start reporting on it separately or giving more color separately. I don't think so. I believe that there's a competitive advantage to not doing so at this point as we're trying to grow it, and we're testing out different strategies. I would hope in the following years, it will be enough of a portion of our business that it would be meaningful to speak about.

Okay. Thank you. And then a couple more here. the nice gross margin expansion that you had both year-over-year and sequentially, driven by branded products. You mentioned supply chain normalizing. I think, some favorable mix. But just trying to get a sense as to how sustainable these higher levels are or if you anticipate some quarter-to-quarter valuability. I know that can just kind of vary based on customer mix. But just any thoughts on the margin -- gross margin profile going forward?

Sure, Kevin, as you said, there will be some variability in the margin mix, particularly in branded products where we're really pricing on an order by order basis. We're obviously very happy with the margins that we had in the third quarter, just given the mix of orders that we had in the branded product space, combined with we're starting to see some of the, what I would call, lower supply chain cost inventory now coming through the system, particularly in that segment. So obviously, we -- as we look ahead, we expect in the fourth quarter margins to still be up to last year, probably a little bit more consistent with the first part of the year than I would say the third quarter. That we'll monitor the fourth quarter, as we talked about on the health care side as we work toward hitting the end of year inventory target may determine how more or less promotional we might need to be in the fourth quarter, that kind of plays into the range of guidance that we've given. But we still expect good margins, again, as I said, probably more consistent with the first half of the year than I would say the third quarter margin.

Okay. thanks for the color. And just lastly, just looking at the selling administrative expense line sequential increase there on an absolute basis. It looks like that was driven by branded products. Just wondering if there's anything to call out there in terms of the increase in the expense base, if there's something more nonrecurring in there or some investments or perhaps just trying to get some color on what's going on there and what it might look like going forward.

Sure. In the case of branded products, a big portion of the increase really related to commissions. So in the branded products business, the commission is based on margins. So given the improvement in margin and the growth in margin despite sales being down single digit, really drove an increase in commission expense and therefore, a larger piece of SG&A for the third quarter.

Okay. thanks for taking the question. I'll jump back in the queue.

And our next question will come from Jim Sidoti with Sidoti & Company. Please go ahead.

Hi, good morning or good afternoon and thanks for taking the questions. Just to follow up on the SG&A question. Can you talk about headcount? Are you - did you add salespeople in the third quarter? Or do you plan to add any more in the fourth quarter?

Are you speaking about a particular segment? Or are you thinking about overall for all SGC?

I guess, primarily for branded products.

Brand products, we have added people. We will continue to add people. It's one of our revenue growing strategies. It's right up there with the best of them, including other sales strategies that we have, Jim, including some inside sales strategies to try to go after smaller accounts, appointment centers, all kinds of things that we're doing right now differently than we've done before. But it is our intention to continue to grow branded products. So we're going to have to have more muscle behind us to do it, and it's going to take more people to do it. We're recruiting actively and even added some talent to our recruiting pool to help recruit more people faster.

Right. And then with regard to capital allocation, I mean you did a great job of generating cash and paying off debt in the third quarter. Should we see a similar trend in the fourth quarter? Or are there opportunities out there inorganic opportunities that you might pull the trigger on?

For the balance of the year, Jim, we're going to remain focused on working capital. There's -- I would say, you can tell from the first 9 months, we drove significant improvement. I think, obviously, our working capital is starting to normalize. So I would not anticipate a similar result in Q4. But with that said, we're going to remain focused on that for the balance of the year as like what I have said previously, we really are targeting a net leverage ratio in the range of 2 to 2.5 times. So we're obviously getting closer. And so that's our focus here through the balance of the year. And then obviously, we'll begin to continue to look at our allocation priorities going forward once we achieve that net leverage objective.

All right. And then you look at your three businesses, you think that are pretty definite growth drivers in all three businesses, different drivers in the different businesses. But out of the three businesses, what one do you think - are you most - you feel invest about at this point in this current line?

That's a hard question because I'm feeling pretty good about all of them. So like asking me which kid I love more. But look, long term, I believe health care has tremendous potential, and it's one of the smallest of our businesses, and it's right there in the middle, but it has two segments of wholesale and a retail and now consumer [indiscernible] it. But if you look at the growth of health care workers in the coming years, you look at the fact that it's not as price-sensitive a business. Most of it isn't the wholesale side is, but the retail side is not. You look at our capability to grow direct-to-consumer in the coming years and the continued choice of health care workers is going to have to be built at one point or we're going to get out, we're all going to get old and not have anybody to take care of us. So the schools are going to have to fill that gap, whether it's through the schools or through integration or wherever they solve it, and that will bring millions of more health care workers into the workforce. Some feeling great about that, but it's - I would say that our call center business is basically in its infancy, if you want to know the truth. I mean, we're a small call center business doing right now under $100 million. That has great opportunity. It provides great free cash flow for us to invest more in it as time goes on. And we've invested greatly in new strategies. We put on our first sales executive this year, putting on a second one, building out a sales team around that. First, marketing dollars we've really ever spent will be this year and more so into next year and not be so reliant on others to bring us business. We've never actually had a sales force. We've grown the business from zero to $80 million without a sales force. And what Jake has done and Phil had done prior to him and branded products was not sort of amazing to take a business that was doing $32 million 7 years ago that's doing - if you just take the merchandise side of that over $250 million a year. So why should I not be equally as excited about all these three businesses. So I didn't answer your question because I don't want any of my children to be angry at me after this call. But I'm excited about it. I think we're in three great businesses that we do not have enough market share in, and I don't think it's going to be that hard to take market share away from our competition in the coming years with all that we're doing internally to make our business stronger.

All right. Thank you.

And our next question will come from David Marsh with Singular Research. Please go ahead.

Thank you, guys for taking the questions. First, I wanted to touch on the GAAP income tax expense in the quarter, which was extremely low as a percentage of continuing income from continuing ops. Could you just touch on that and give us some idea of what you expect in the next quarter and in the coming year? Were there some - were there some tax loss carry-forwards that benefited you in the quarter and that will continue to benefit you as you roll forward?

Dave, it's really in the quarter and so far this year, it's really been the mix of our profit domestic versus international. And obviously, we have a large amount of profit through our contact center business in Central America. So that we benefit from that mix, which has driven a lower rate this year in the, I'll call it, high single digits, and we would expect that to be the case through the balance of the year. And then obviously, next year, as we look to plan next year, we'll relook obviously at the mix of where, again, our profit is from a foreign and domestic perspective. But that's really been the driver of the rate this year. We haven't had this year as many discrete items as we did last year, which drove the rate higher last year, again, due to the discrete nature of what we had. But at this point, it's really a reflection of our foreign versus domestic profit.

Got it. Thank you. And then secondly, just with regard to the call center business, I know in the last quarterly call, you had talked about maybe some customers that had to refresh that quite as high levels, but obviously, some nice sequential growth this quarter. Just trying to kind of parse through the guidance for the year that you gave. I'm trying to figure out, are we -- are you guys thinking sequentially kind of flat-ish for the fourth quarter? And could you just talk, I guess, more generally about how your renewals have been in the third quarter maybe versus the second quarter and maybe the beginning of the fourth quarter versus the second quarter? Have you seen improvement there and just kind of general overall tone of the segment?

We are seeing some improvement. I spoke about last quarter, the fact that to date, we have lost a few hundred through the end of June, we have lost a few hundred 300-and-some-odd of existing customers who were just scaled back because of the macro environment. And they have not since grown the number of seats that we have with them. But we have replaced all of those, and we spoke about that again last quarter. They had all been replaced by new seats. And we continue to put on new seats. We're putting on new seats at a clip that we haven't done before. But again, we're still trying to -- we've got the deficit of 300-some-odd seats that we're fighting against all year in the comp. The good news is we're working on more larger opportunities than we've ever worked on. We put on as more customers than we've ever put on. And quite frankly, we're working on more opportunities that when realized, will bring us greater degrees of revenue in future periods. We continue to put on seats in the month of November, and we'll put on a few in the month of December. December is not traditionally a period where we put on a lot of seats. Everybody kind of holds back and says how they want to get going in January. But the quarter should turn out well in our guidance with respect to that quarter. I'll let Mike speak to that with respect to the call centers, where we're headed with that.

Sure. Yes. I mean we expect to continue to see growth in that segment in the fourth quarter. I think as we touched on, there's been sequential growth throughout the year, certainly from an EBITDA perspective, given that we started at a pretty low point in the first quarter with some of the cost increases and being a little late in terms of increasing pricing. But the pipeline is strong as we've had before. We're onboarding more new customers, and it's looking strong for the first quarter. So we feel, again, like the contact center business is picking up momentum throughout the year and into 2024.

Great. That's really very helpful. And then lastly for me, with regard to free cash flow, I mean, fantastic job on debt repayment year-to-date. Would we expect that there would be a little bit more sequential debt repayment in the fourth quarter? Or do you start to kind of fight against some working cap trends a little bit? I mean I guess just if you could just kind of give us a holistic picture of what fourth quarter free cash flow looks like and where it's going?

Yes. As I mentioned, I think we've made a lot of progress, I think, through -- for the first 9 months. So I would expect here in the fourth quarter, things to normalize a bit. And of course, as we look to the level of volumes in Q1, depending upon our inventory levels, we may need to start making some investments as we planned for Q1, depending upon what those revenue levels look like. So I would say, Dave, in Q4, we would still look where there's opportunity with free cash flow still look to, again, continue to bring the debt levels down to get towards that targeted ratio we're looking for, but certainly not at the level that we've been generating over the last 3 quarters. If you look at our - if you had a chance to look at our cash flow statement, we've already brought inventories down pretty significantly so far this year. Receivables have been coming down. So I think we've made a lot of progress there. We're - again, there's still some opportunity there, but not to the extent that we've seen over the first three quarters.

Right, right. That makes a lot of sense. Thank you, guys very much for taking the questions and congrats on the quarter.

Thank you.

And that concludes our question-and-answer session. I'd like to turn the conference back over to Michael Benstock for any closing remarks.

Okay. Thank you, operator. I'll jump the gun there a little bit. I want to thank everybody for joining our call. We're looking forward to finishing the year strong. Our intention is to continually grow SGC's market share across all of our three attractive markets and to do so profitably. The ultimate goal, obviously, is further enhancing shareholder value. We're confident that we can do so even during uncertain times. We look forward to updating you on our full year results, and please don't hesitate to reach out with any questions before then enjoy this evening, and thanks again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.+